AVGO: Upcoming AI Chip Production With Key Partner Will Shape Competitive Position

Key Takeaways

• Accelerating AI chip demand and advanced networking products are boosting revenue growth, margins, and market share in core semiconductor segments.
  
• Rapid VMware integration is fueling recurring software revenue and sustained margin expansion, while market diversification enhances future profitability.
  
• Heavy concentration in AI customers, weak legacy segments, competitive threats, risky VMware integration, and high debt collectively pose significant risks to revenue diversity and profitability.

Catalysts

Designs, develops, and supplies various semiconductor devices and infrastructure software solutions worldwide.

• Broadcom is experiencing accelerating demand for custom AI accelerators (XPUs) from hyperscale and large language model customers, underscored by the addition of a major fourth customer and a strengthened backlog, indicating robust multi-year revenue growth in the AI semiconductor segment.
  
• The company's Ethernet networking and switching portfolio is capitalizing on the trend towards ever-larger and more complex AI compute clusters, with next-generation products (Tomahawk 6, Jericho4) addressing the need for higher bandwidth, lower latency networking, supporting higher ASPs and expanded market share, positively impacting both top-line revenue and gross margins.
  
• Broadcom's successful integration and rapid enterprise adoption of VMware Cloud Foundation is enabling a transition to recurring software revenues, with over 90% of its top 10,000 accounts committed and ongoing deployment likely to drive sustained margin expansion in the high-margin infrastructure software segment.
  
• Strong multi-year bookings, a record $110 billion backlog (driven primarily by AI), and disciplined capital allocation (R&D investments, high free cash flow, and dividends) build a foundation for continued earnings growth and per-share expansion.
  
• Early signs of a cyclical recovery in non-AI semiconductor segments (particularly broadband), coupled with ongoing demand from IoT, cloud, and 5G/6G markets, position Broadcom for further revenue diversification and gradual recovery in overall profitability.

Broadcom Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Broadcom's revenue will grow by 25.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 31.4% today to 42.5% in 3 years time.
• Analysts expect earnings to reach $50.8 billion (and earnings per share of $11.0) by about September 2028, up from $18.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $34.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 45.8x on those 2028 earnings, down from 84.2x today. This future PE is greater than the current PE for the US Semiconductor industry at 33.5x.
• Analysts expect the number of shares outstanding to grow by 0.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.13%, as per the Simply Wall St company report.

Broadcom Future Earnings Per Share Growth

Risks

• Broadcom's rapid AI-driven revenue growth is highly concentrated among just four major custom XPU customers; any slowdown in spending, competitive shift, or self-sufficiency among these hyperscalers could materially impact future revenue and earnings stability due to customer concentration risk.
  
• Sustained softness and slow, U-shaped recovery in non-AI semiconductor segments-such as enterprise networking, storage, and wireless-implies structural stagnation or secular decline; ongoing weakness here could reduce long-term revenue diversification and lead to lower aggregate margins as legacy businesses commoditize.
  
• Increased competition from major US and Asian semiconductor firms in both custom silicon (ASICs/XPUs) and Ethernet-based networking threatens Broadcom's pricing power and market share; the need for continuous high R&D investment to "out-innovate" rivals poses risks to future net margin expansion.
  
• Expansion into infrastructure software, especially the VMware integration, faces execution risk: successful customer deployment (particularly beyond top large enterprises), realization of advanced services upsell, and mitigation of potential commoditization remain uncertain, which may constrain software segment revenue growth and profitability.
  
• Elevated financial leverage from acquisition-driven strategy ($66+ billion in debt) increases exposure to higher interest rates and leaves less flexibility in downturns; if integration synergies from acquisitions like VMware underdeliver or software sales do not scale, net earnings and shareholder returns could be pressured.

Valuation

• The analysts have a consensus price target of $360.199 for Broadcom based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $415.56, and the most bearish reporting a price target of just $218.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $119.6 billion, earnings will come to $50.8 billion, and it would be trading on a PE ratio of 45.8x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of $336.67, the analyst price target of $360.2 is 6.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.